On Wednesday I took a look at Fedex (FDX) and had the following observation on its recent price action and technical set up (read here):
Shares of Fedex (FDX) have nearly doubled-up the performance of the S&P 500 (SPX) since the market lows in 2009, up about 400% vs the SPX up about 200%. What’s interesting about the recent price action in FDX is that the stock has not confirmed the new recent highs in the SPX, and has shown signs of waning momentum, with a series of lower highs and lower lows since late December:
There are those who believe in some old school market timing >>>> like the Dow Theory which basically suggests that new highs in either the Dow Jones Industrials needs to be confirmed by the Dow Jones Transports, or vice versa.
You would have had to live on another planet not to know that the Dow Jones Industrials (INDU) just broke out to new all time highs, but it hasn’t really done so with a ton of gusto, as there are a handful of components that have weighed it down like AXP, CVX, PG, IBM & XOM, while a handful like BA, DIS, HD & V have done much of the heavy lifting:[caption id="attachment_51397" align="aligncenter" width="600"] INDU 6 month chart from Bloomberg[/caption]
The obvious push and pull in the INDU is that it consists of many of the largest U.S. multi-multinationals who have been struggling with adverse affects of the strong dollar, which for now appears to be trumping the benefits of lower input costs like oil and other industrial commodities.
On the flip side, the Dow Jones Transports (TRAN) has not made a new high since late November, failing to confirm the highs in the industrials, which is alarming from a group that is perceived to be one of the largest beneficiaries from lower input costs given the collapse of industrial commodities:[caption id="attachment_51398" align="aligncenter" width="600"] Dow Jiones Transport Index (TRAN) 6 month chart from Bloommberg[/caption]
The iShares Transportation Average etf (IYT) which tracks the TRAN is heavily weighted to the top five holdings (FDX, UNP, KSU, NSC &UPS) making up almost 45%. As I noted above, FDX the largest holding at 12% looks a lot like the TRAN, and with their earnings coming up March 18th, and the recent disappointment from UPS, and the potential for oil stabilization to hurt sentiment, the Transports appear to be a great candidate for a short dated short biased trade. But here is the thing, options in the IYT trade by appointment as there is only 10,000 total open interest in the etf, so for those who agree with the thesis they are probably better off playing a single name like FDX, but with that you obviously have more idiosyncratic risk, and you could always just play the DIA, the etf on the Dow Jones Industrials if you buy into the Dow Theory. But if I could play the IYT with deeper options depth, this is how I would do it:
Hypothetical Trade: IYT ($163.30) Buy March 162/156 put spread for 1.40
– Buy 1 March 162 put for 1.90
– Sell 1 March 156 put at .50
Rationale – This is a decent risk reward on the index rolling over from here as the first area of support would be at the 50 day moving average of 160.60 at which point the spread would be intrinsically breakeven. Any move below that and there is plenty of room for the structure to make a nice profit.